Alan Hughes: Lessons from the FCA’s RDR review

On 25 July the FCA released the results of its first post-RDR thematic review (TR13/5). The review focused on how firms are coping with the implementation of the RDR rules and the impact this is having on the consumers of advice services – the people whom the RDR was designed to assist.

TR13/5 should be essential reading for every firm. Even if a firm has been operating a fee-based model for several years, there is some useful information in there for everyone which may help even the best firms to tweak their services and/or documents to make them more user-friendly and enhance their standing in the eyes of new and existing clients.

The main thrust of the review is clarity in three main areas – charges, the nature of restricted/independent advice and the nature of initial and ongoing services and how a firm’s disclosure documents address these three issues.

The key points to draw from the review are:

Transparency of fees

Firms should make sure that the levels of initial and ongoing fees are as clear as possible. Long paragraphs of text combined with fees expressed only as percentages are very unpopular. Both consumers and the FCA like cash examples and imaginative layouts (eg tables etc) to present cost information clearly. Hourly rates without an indication of how these may translate into actual costs were a particular turn-off.

The review also indicates that firms find it difficult to clearly express their charges for regular contribution investments.

It was also stated that examples based on different levels of investment are useful. While some good examples were given, firms need to be careful not to overload consumers with too much information by way of examples. It would be sensible for firms to look at their target market and client profiles and tailor their examples to those.

The timing of disclosure

The FCA review also gives the timing of disclosure careful consideration. Most firms provide their initial disclosure at a first meeting with the client giving firms the opportunity to explain the information and answer any queries.

However, the FCA found that many of the consumers who participated in the review expressed a desire to have the documents provided before the first meeting to give them a better opportunity to consider the contents and raise any queries at that meeting.

By providing disclosure at the first meeting consumers tend not to engage with the documents properly.

I suspect that many firms do not supply disclosure documents prior to the first meeting as they consider that this could put potential clients off. However, participants in the review said this was not the case. Firms then provide the documents at the first meeting but consider that the personal interaction with the client at that meeting is more likely to be the clincher.

The research also shows this to be true – it is the personal relationship that is most important. However, what firms should consider is whether clearer and earlier provision of those documents could add to the relationship and give the firm an edge – this is what the research suggests.

Independent vs restricted

One of the areas in which the FCA was most critical concerns firms’ understanding of independent vs restricted and how this is explained to consumers. This has been a difficult issue since the FSA decided on this particular concept but firms should now be getting to grips with it.

When it comes to explaining what this means to consumers it is understandable that firms can struggle. ‘Restricted’ sounds inherently negative and firms understandably do not want to spend time explaining what they cannot do.

The FCA suggests a generic explanation of restricted followed by a more specific explanation of how this applies to the firm in question and it used the following as a good example: “Restricted advice means that the adviser will only consider recommending investments from a limited range of products and/or providers. Different advisers are restricted in different ways. Our firm is restricted as we only offer advice on pensions. You may ask us for a list of the products we offer.”

I do not like the first line of the above at all – it sounds negative. I would prefer to see the firm first emphasise the service it provides in its specialist area – pensions – rather than start off by talking about a “limited range of products and providers”.

Consumer understanding of independence

The biggest problem, and perhaps the one that will cause the most concern to the FCA, is that many consumers still appear to believe that all advisers are either independent or recommend the products of only one company. In some ways this is not surprising as we have gone from tied, through multi-tied and now to restricted, all with different meanings. It is also perhaps a function of the rather clumsy restricted/independent definition that we ended up with post-RDR.

But this is an issue that the FCA and firms need to address quickly because if consumers do not understand this distinction it could lead to perceived consumer detriment and dissatisfaction. The FCA designed this process – it now needs to help firms to make sure that it works.

Disclosure of service provided

The final area that is highlighted is that firms do not always explain clearly what both their initial and ongoing services entail.

The good news is that consumers indicate that a clearer explanation of services makes them more willing to pay charges, particularly the higher charges associated with initial advice.

Overall, I would regard the glass as half full. Firms have made a real effort to embrace the new regime, with some success.

But there is room for improvement in the areas highlighted and it appears that clearer and more timely disclosure in these areas would enhance new and existing client relationships, making it easier for firms to sell their services and charges to clients.

It would be easy for firms to sit back in the knowledge that it is still the personal relationship that matters and regard their disclosure documents as a mere regulatory inconvenience. But that would be a mistake as better disclosure and explanations of services and charges could make a firm more profitable and give it an edge against its competitors.

And as I have said previously when presenting to IFAs, your disclosure documents are often the first written information that you provide to clients. This is a great chance to make a good first impression but if they are poorly drafted and difficult to understand, the opposite is also true.